Why ESG Matters: The Link Between Sustainability and Financial Performance
Khusbu Agrawal
Khusbu Agrawal (the “Valuer”) is a Fellow Member of the Institute of Company Secretaries of India (ÏCSI) having membership No. F11833. The Valuer is registered with the Insolvency and Bankruptcy Board of India (Registration No. IBBI/RV/03/2021/14393) to undertake the Valuation of Securities and Financial Assets of the Companies. She has more than 8 years of experience in Corporate law, merger & acquisitions. She has also done LLB, Master’s in Commerce and Master’s in journalism & Mass Communication. Further, Ms. Khusbu Agrawal has done post qualification course i.e. Certificate Course on Intellectual Property Rights conducted by ICSI. She is a qualified Independent Director and Social Auditor.
In today’s fast-evolving corporate environment, businesses are not evaluated solely on their profitability or growth metrics. Increasingly, Environmental, Social, and Governance (ESG) factors are becoming critical indicators of long-term success. Investors, regulators, and consumers alike are focusing on how businesses impact the planet, treat their stakeholders, and govern themselves. What was once a matter of corporate social responsibility is now a key driver of financial performance and enterprise value.
Understanding ESG: More Than a Buzzword
ESG is a broad framework that encompasses three core dimensions:
- Environmental: How a company manages its ecological footprint—carbon emissions, waste, energy use, water conservation, and biodiversity.
- Social: The way a company interacts with employees, customers, suppliers, and the community—diversity, labor standards, human rights, and product safety.
- Governance: How a company governs itself—corporate policies, board composition, executive compensation, transparency, ethics, and shareholder rights.
These three pillars collectively inform stakeholders about the non-financial risks and opportunities a company faces. What’s noteworthy is how these non-financial metrics are now closely intertwined with financial performance.
The Evolution: From Compliance to Value Creation
A decade ago, ESG considerations were seen as a compliance obligation or a public relations effort. Companies would often release sustainability reports without integrating these principles into their core strategy. But that mindset has dramatically changed.
Today, ESG is viewed as a strategic imperative. Firms integrating ESG into their business models are outperforming their peers on various financial metrics. Several studies by Morgan Stanley, Harvard Business Review, and MSCI have shown a positive correlation between strong ESG performance and superior returns, lower cost of capital, and operational resilience.
Multiple factors drive this shift:
- Investor pressure: Institutional investors, such as BlackRock and Vanguard, are demanding ESG disclosures and prefer ESG-compliant portfolios.
- Regulatory action: Governments and regulators are mandating ESG reporting and climate-related financial disclosures.
- Consumer awareness: A growing segment of consumers prefers sustainable brands and rewards companies that align with ethical practices.
- Risk mitigation: ESG helps companies foresee and manage long-term risks like climate change, regulatory fines, supply chain disruptions, and reputational damage.
ESG and Financial Performance: The Tangible Link
The link between ESG and financial performance is no longer speculative—it’s being substantiated with data.
- Cost Efficiency and Operational Savings
Sustainable operations often lead to lower costs. Energy-efficient buildings, waste reduction programs, and optimized supply chains directly contribute to higher margins. Companies that focus on environmental efficiencies typically reduce their resource dependency, which protects them from price volatility. - Access to Capital
ESG-compliant companies have greater access to capital markets. green bonds, ESG-linked loans, and sustainability credit facilities offer preferential terms to firms with strong ESG credentials. Investors and financial institutions are also increasingly integrating ESG scoring into their due diligence. - Enhanced Brand Loyalty and Market Share
Companies that prioritize diversity, fair labor practices, and community development build stronger reputations. This attracts loyal customers and employees. For instance, brands that stand up for social justice or engage in transparent sourcing practices often resonate more strongly with millennials and Gen Z consumers. - Lower Regulatory and Legal Risks
Compliance with ESG-related norms protects companies from legal entanglements, environmental penalties, and stakeholder backlash. This translates to fewer disruptions and liabilities, ensuring consistent performance over time. - Talent Attraction and Retention
Employees today care about purpose, ethics, and values. Organizations that promote inclusive cultures and responsible governance attract top talent. This leads to improved productivity, innovation, and retention, ultimately impacting the bottom line.
Sector-Specific Impact of ESG Integration
Different sectors experience the impact of ESG in distinct ways.
- In manufacturing and energy, environmental factors such as emissions and water usage are critical.
- In financial services, governance and transparency have a more significant impact.
- In tech companies, social aspects like data privacy, employee rights, and diversity take centre stage.
Therefore, ESG integration must be tailored according to sectoral and operational realities. One-size-fits-all approaches do not work, and businesses must identify which ESG factors are material to their industry.
ESG Ratings: A New Dimension in Performance Evaluation
To quantify ESG performance, rating agencies such as MSCI, Sustainalytics, and Refinitiv assign ESG scores based on standardized criteria. These ratings influence investor sentiment and stock valuations. However, ESG ratings are still evolving, and the lack of uniformity can be a concern. Nonetheless, they remain valuable tools for stakeholders to assess corporate responsibility and risk exposure.
The Way Forward: Embedding ESG into Core Strategy
For companies to truly leverage ESG benefits, integration must go beyond reporting. It must be embedded in corporate strategy, risk management frameworks, and capital allocation decisions. The leadership must align performance incentives with ESG goals, and boards should be actively involved in monitoring progress.
Steps companies can take include the following:
- Conducting ESG materiality assessments to identify key focus areas.
- Setting measurable goals and KPIs (e.g., carbon neutrality by 2030, board diversity targets).
- Investing in technology and tools to track and report ESG data.
- Engaging stakeholders—including investors, customers, employees, and regulators—in ESG initiatives.
- Regularly reviewing and updating policies in response to evolving ESG expectations.
Challenges Ahead: Not All That Glitters is Green
Despite the momentum, ESG integration isn’t without its hurdles. Greenwashing—where companies exaggerate or falsify ESG claims—is a growing concern. The absence of standardized global reporting frameworks also leads to inconsistent and sometimes misleading disclosures.
Moreover, ESG investments require a long-term view. In the short term, these may involve higher upfront costs, realignment of processes, and cultural transformation. But the long-term benefits far outweigh the initial challenges.
Conclusion: ESG is a Financial Strategy
In essence, ESG is no longer a peripheral concern—it has become a core component of modern business and investment strategy. The companies that understand and act on this reality are positioning themselves not just for regulatory compliance, but for resilience, growth, and value creation. In an era where trust, transparency, and sustainability are currency, ESG stands at the intersection of purpose and performance.
Firms that ignore ESG may survive today, but those that embrace it will lead tomorrow.
For any clarifications or queries, please feel free to reach out to us at admin@fintracadvisors.com
Disclaimer
The content published on this blog is for informational purposes only. The opinions expressed here are solely those of the respective authors and do not necessarily reflect the views of Fintrac Advisors. No warranties are made regarding this information’s completeness, reliability, or accuracy. Any action taken based on the information presented in this blog is strictly at the reader’s own risk, and we will not be liable for any losses or damages resulting from its use. We recommend seeking professional expertise for such matters. External links on this blog may direct users to third-party sites beyond our control. We do not take responsibility for their nature, content, or availability.
